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June 7, 2018

Debunking the Impact of Blockchain on Hotel Distribution

By Max Starkov

Background:

A recent article on the Nasdaq website called “How Blockchains Are Changing the Hotel Industry” claims that blockchain-based platforms “offer promising solutions” to particular areas of difficulty in the hospitality industry, including blockchain-based hotel booking platforms. Before we jump on analyzing blockchain technology’s impact on hospitality, let’s quickly review what this new technology and some of its more popular applications are all about.

Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Blockchain operates as a continuously growing list of records, called blocks, which are linked and secured using cryptography/secure communications. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data.

To be used as a distributed ledger, a blockchain is typically managed by a peer-to-peer network (so-called miners or ledger keepers), collectively adhering to a protocol for validating new blocks. These miners use specialized software to verify the transactions, which consumes tremendous amounts of power. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks (Wikipedia).

Blockchain vs. Bitcoin: Blockchain and Bitcoin are two completely separate terms, though they are being mixed by many authors and in many publications. Bitcoin is one of the many applications of using blockchain technology, while blockchain is the underlying technology platform enabling cryptocurrencies, i.e. artificial digital currency not affiliated with a bank or a national currency issuing institution, such as Bitcoin. Unlike traditional currencies such as the US dollar, which is backed by the full assets of the US government, which are worth an estimated $269.6 trillion, cryptocurrencies are not backed by valuable assets like gold deposits, land, natural resources, etc.

Blockchain Technology and Hotel Distribution

Blockchain technology may have application in loyalty programs and contracting—here we will focus only on its much-hyped use in hotel distribution. Blockchain has been described in some publications, including in the Nasdaq article quoted above, as the “future of hotel distribution.” The authors claim that the main advantages of blockchain distribution are not that this technology introduces tremendous efficiencies in the very archaic hotel distribution space, or that it eliminates the long chain of legacy systems interacting with each other (PMS, CRS, etc.). Rather, the one and only advantage cited in all publications is that blockchain enables “commission-less” distribution—i.e., free distribution—and does this securely.

However, there should be a high level of skepticism that at this stage blockchain technology can be used successfully for hotel inventory distribution. Here is why:

Hotel Legacy Technology:

Any blockchain player has to tackle the complexity of hospitality technology, consisting of many moving parts, including old legacy systems that are barely functioning, co-existing with ultra-modern, next-gen apps and promising AI and blockchain implementations. Where do you start? Deep integrations/two-way APIs are needed with legacy systems like PMS, CRS, Hotel Switches, GDS, and Channel Managers in order to build real-time hotel inventory availability and pricing connectivity with hotel chains, mid-size and smaller brands, and independents.

Just building an OTA-type CRS with RMS, digital and video content and personalization capabilities, fully interfaced with the numerous legacy systems in travel, would cost any blockchain player that enters the space billions of dollars and take many long years to develop.

A blockchain distribution system has to interface with many of these legacy systems, which means a big investment in API development and ongoing maintenance. It also means that the hotel will continue to incur transaction fees from CRS, website booking engines, and more, so where are the savings?

To achieve any “commissionless” distribution, the blockchain system needs to replace all of these legacy systems, not just interface with them. Who will pay for this huge investment? Where would a blockchain distribution system recuperate its investments in APIs, ongoing API management, or completely replacing the legacy distribution systems?

Hotel Supply:

Gaining access to hotel inventory is a major barrier to entry in online travel. It’s all about reach: How will a blockchain booking system get access to 750,000 hotels to match the reach Booking.com already has? Or Expedia’s 685,000 hotels? How long would it take for a blockchain player to establish the deep hospitality industry expertise and relationships developed by the OTAs for over 20 years now? Hospitality is a relationship industry that is very hostile to new entrants and vendors.

Instant Reservations:

Most of the hotel reservations today require instant confirmations for all website, mobile app, voice channel, OTA and GDS bookings. Due to the very definition of blockchain, each transaction must be verified by the miners of the blockchain distributed network. Unfortunately, “instant” and “confirmation” do not go hand in hand for any blockchain technology application.

Here is a case study from the most advanced blockchain application: Bitcoin, where the average Bitcoin transaction generally needs six confirmations from miners before it’s processed. According to CoinCentral, the average time it takes to mine a block is 10 minutes, so you would expect a transaction to take around an hour on average. However, the recent popularity boom of Bitcoin has caused severe congestion on the network; the average time for one confirmation has recently ranged anywhere from 30 minutes to over 16 hours in extreme cases.

Travel consumers will not wait 16 hours to get a confirmed hotel reservation, that’s for sure.

Highly Fluid Hotel Inventory:

Hotel inventory is highly fluid and riddled with transient reservation changes and no-shows, re-bookings, and group cancellations. Many hotels experience reservation changes and no-shows to the tune of 15%-30% of occupancy on any given night. This inventory fluidity is in stark contrast to the permanent character of any blockchain transaction. Once the transaction (hotel booking) is recorded on the blockchain, it cannot be altered retroactively without the alteration of all subsequent blocks. So how will hotel bookers be able to update their reservation, change the arrival or departure date, add another guest to the reservation, or upgrade their room if their reservation is set in stone? Make a new reservation that will take up to 16 hours to verify?

Transactions vs. Content:

Hotel reservations require more than simple verifications by blockchain miners. Hotel reservation systems, in addition to carrying real-time hotel inventory availability and pricing, serve as huge depositories of content: rate information and descriptions, booking terms and conditions, hotel and room amenity descriptions, and visual content. Content is definitely not a strong suite for any blockchain platform, which is primarily transaction oriented.

Economics of the Blockchain Distribution System:

As mentioned, blockchain is being promoted as “commissionless,” i.e., no cost to either hotels or travel consumers. Yet, any hotel distribution system needs huge investments in order to function and serve its core purpose:

As a distributed system, any blockchain platform needs to verify the transactions by a peer-to-peer network. Where would the money come from to pay for the miners/ledger keepers who need powerful equipment and whose specialized software consume tremendous amounts of power and Internet bandwidth? Someone has to pay for the equipment, time and effort, and with no commissions flowing through the system, this would not be a self-sustainable enterprise.

Any blockchain distribution system needs to convince two distinct audiences of its value proposition: hoteliers and travel consumers.

To make hoteliers use your system you need to hire a robust sales force to knock on doors and sign-up hoteliers; advertise in industry publications; invest in SEO, SEM, display advertising; and attend and exhibit at industry conferences.

To make travel consumers use your new distribution platform you need to invest in travel consumer marketing so that consumers become aware of this new booking channel and embrace it, rather than booking via the hotel websites or the OTAs. As a reference, the OTA triopoly (Booking Holdings, Expedia Group and Ctrip) invest $10 billion a year in consumer advertising.

Technology: As mentioned, APIs with existing legacy systems in hospitality are a very expensive proposition. Managing your own inventory management system is very expensive, too. Expedia invested several billion dollars in their new CRS, which is now used by all Expedia portfolio companies, including Hotels.com, Travelocity, and Orbitz.

If the blockchain distribution system does not charge any commission, where would the money come from to pay for all the above? The economics simply does not work.

Blockchain Distribution and Payment Security:

Blockchain transactions have been promoted as super secure. This is crucial for any hotel distribution system. In fact, the perceived security of transacting via blockchain technology has been continuously discredited by many cases of hackers successfully targeting cryptocurrencies. As of today, more than 3 million bitcoins have been lost to hackers, scammers and crypto thieves. “All the hackers in the world are targeting cryptocurrencies,” Eric Larcheveque, CEO of cryptocurrency security company Ledger Wallet, said recently. In a much-publicized case, Steve Wozniak, the co-founder of Apple, had $70,000 in bitcoin stolen after falling for a simple, yet perfect, scam. CNBC offers an interesting read on the subject.

Conclusion:

The much-promoted use of blockchain in hotel distribution is another affirmation that we are an industry of buzzwords. Many people are getting overly excited by these new technologies and their perceived “magic wand” ability to solve industry deficiencies.

Before we all jump on the blockchain bandwagon, the industry needs to deal with the fundamentals in distribution first, including optimizing the direct channel, fixing an outdated property website, improving SEO, launching multichannel campaigns, and finally doing something about CRM to better engage and retain customers, among other initiatives.

Only then would it be advisable to start thinking about all the new fancy technologies out there by partnering with smart vendors who are already working on the subject matter.

Part of NextGuest Technologies, HEBS Digital and Serenata CRM, the most comprehensive Hotel CRM Suite today, are the creators of the hospitality industry’s first Fully-Integrated Guest Engagement & Acquisition Platform.